Day: September 28, 2017

The Fraud Triangle

The Fraud Triangle

One of the older and more basic concepts in fraud deterrence and detection is the fraud triangle. The fraud triangle is also known as Cressey’s Triangle, or Cressey’s Fraud Triangle. Cressey’s Fraud Triangle gets its name from Donald Cressey. Cressey was one of the “nations leading experts on the sociology of crime”. He authored a few books including Other People’s Money, Theft of the Nation, and co-authored Principles of Criminology with Edwin H. Sutherland. Cressey is honored by many anti-fraud organizations, including the Association of Certified Fraud Examiners.

The fraud triangle seeks to explain what must be present for fraud to occur. There are three basic things that must be present in order for fraud to occur: opportunity, incentive/pressure/motivation, and ability to rationalize. Without these three things, fraud is unlikely to occur (www. examiner. com). Opportunity is the element over which business owners have the most control. Limiting opportunities for fraud is one way a company can reduce it. The opportunity to commit fraud is possible when employees have access to assets and information that allows them to both commit and conceal fraud.

Employees are given access to records and valuables in the ordinary course of their jobs. Unfortunately, that access allows people to commit fraud. For instance, a cashier can steal money out of the cash register because it is there. If the cashier was required to drop all cash in to an underground safe to which he did not know the combination, opportunity would not exist (www. allbusiness. com) Motivation, is a pressure or a “need” felt by the person who commits fraud. It might be a real financial or other type of need, such as high medical bills or debts.

Or it could be a perceived financial need, such as a person who has a desire for material goods but not the means to get them. Motivators can be nonfinancial. There may be high pressure for good results at work or a need to cover up someone’s poor performance. Addictions such as gambling and drugs may also motivate someone to commit fraud (www. examiner. com) The third leg of the fraud triangle is rationalization. Embezzlers do not view themselves as criminals. They see themselves as ordinary, honest people who are caught in a bad set of circumstances. Rationalization occurs when an employee justifies why they commit fraud.

Common rationalizations include making up for being underpaid or replacing a bonus that was deserved but not received. A thief may convince himself that he is just “borrowing” money from the company and will pay it back one day (www. allbusiness. com) Why is the Fraud Triangle so important? The fraud triangle is one of the most effective and important procedures a CPA or auditor can use when determining the existence of fraudulent behavior or activities in a company. This concept constitutes the science of forensic accounting and help to uncover any illegal activities.

Implementation of a comprehensive fraud prevention plan is vital to the financial health of any business (www. enotes. com) CITATIONS “Employers: Learn The ‘Fraud Triangle’ To Prevent Fraud. ” Accuscreen. N. p. , n. d. Web. 11 Sept. 2011. . “Financial Fraud 101: Understanding The Fraud Triangle. ” Examiner. N. p. , 17 July       2009. Web. 12 Sept. 2011. . “The Fraud Triangle And What You Can Do About It. ” All Business. N. p. , 30 Nov. 2007. Web. 12 Sept. 2011. . “World of Forensic Science. ” Enotes. N. p. , n. d. Web. 11 Sept. 2011. .